Wednesday, January 7, 2009

Regulatory Cacophony II

Maybe I am beating a dead horse. Oh well. Today the Washington Post ran the following story: "Indian Software Giant Admits Financial Wrongdoing". The focus of my post is that this is one more example of a sophisticated operation that went on for many years without detection. In fact the Post wrote: "Ironically, Raju had received the "entrepreneur of the year" award in 2007 from the consulting firm, Ernst & Young. The Council of the Institute of Directors said it will be withdrawing the Golden Peacock Global award for best corporate governance that it gave Satyam in 2008."

Those who oppose regulation claim that the free marketself-regulates, that abuses will be quickly uncovered, and that many regulations, such as Sarbanes-Oxley Act, are expensive impediments to the growth of the free market. This claim is repeated over and over again, even in the face of obvious, in your face, anecdotal evidence, such as the collapse of our financial system.

If anti-regulatory crowd does not want regulation then why are there so few calls for ethical behavior by them?

If Sarbanes-Oxley is so expensive, why is it OK to give executives multi-million dollar compensation packages?

If the public can quickly discover corporate abuses of the free market system, then why was Madoff able to operate for 20 years virtually undetected. The Post writes: "Chairman and founder B. RamalingaRaju took responsibility for the fraud and resigned in a letter he submitted to Satyam's board. The letter said that the company lied about profit and revenue for several years, inflating revenue by 33 percent and profits more than tenfold between July and September of last year. " (emphasis added) Obviously the free-market system does not quickly respond to abusive behavior.

Here are a couple more points, I've been meaning to throw in on why regulation is needed.

How do you feel about taking a Salmonella testing kit every time you go grocery shopping?How would you like to take an Octane testing kit every time you visit the gas station?How would you like to take a weighing scale every time you go grocery shopping?How would you feel if the person in front of you at the check out lane opens every purchase and tests it out before buying?How many of us could afford to hire an accounting firm before investing in a company?

I hope that those examples make the point that some regulations actually facilitate commerce. So if we follow what the anti-regulatory crowd says, it would be our responsibility to carefully weigh every minuscule purchase before buying to assure that we are not being ripped-off. To a degree they are correct, but in the extreme we wouldn't have any commerce since we would be spending all our time testing and verifying.

Those who oppose regulation need to take a look at the abuses of the free market system and propose meaningful actions beyond the mindless endless looping mantra of "no regulation". We need to have a reasonable trade-off between regulation and the free market.